The ultimate hedge

Thursday, June 28, 2012

Elsewhere in this magazine you can read about how the top publicly-traded liner carriers collectively lost nearly $6 billion in 2011.
One of the biggest contributions to that red ink was from industry capacity leader Maersk Line, which lost nearly $500 million on its own.
But here’s another number to ponder: $33 billion. That’s how much the A.P. Moller-Maersk Group has made in operating profits from its oil and gas activities in the last five years (never mind the $1.2 billion it made in the first quarter of 2012).
Let’s put this number in perspective. The best performing publicly-traded line over the past five years has been OOCL, which has banked $1.6 billion in operating profits from 2007 through 2011. As solid as that is, that’s less than 5 percent of the profits the Maersk Group has gleaned from its oil business in the same period.
On a group-wide basis, the parent companies of the top 15 public lines have made a collective $69.5 billion in operating profits in the past five years, according to information compiled for American Shipper by the global restructuring consulting firm AlixPartners. But Maersk has earned $43.6 billion of that amount, or 62.7 percent. More than three quarters of Maersk’s group profits in that time have come from oil.
It doesn’t take a rocket scientist to see how beneficial it has been for Maersk — the container line — to have a sister company in the oil business.
That’s what was brought to mind not only when comparing the financial results of carriers this year, but also when it was reported in May that Delta Air Lines was buying a Pennsylvania oil refinery from ConocoPhillips to make its own jet fuel.
The move by Delta was a clear move to take control of its largest, and most volatile, operating cost. As Delta Chief Executive Officer Richard Anderson said at the time, refineries enjoy the largest margins on jet fuel, and in essence, take profits away from airlines.
The $150 million Delta paid for the refinery, plus another $100 million to convert it to maximize jet fuel production, is roughly the cost of a widebody plane, he noted, and will save the airline an estimated $300 million in fuel costs each year, with 80 percent of its U.S. fuel needs met by the refinery directly or indirectly. (See the Air Integrators column in this issue, page 28.)

Bunker is the lowest grade of fuel, and not a particularly high-margin product, so there’d be far less to gain by controlling the actual refining of crude.

The situation isn’t entirely applicable to liner carriers. Bunker is the lowest grade of fuel, and not a particularly high-margin product, so there’d be far less to gain by controlling the actual refining of crude.
In addition, though Delta is a global airline, it has a distinct home market. Most ocean carriers depend on trades outside of their national boundaries. How feasible and effective would it be for Hanjin to buy a refinery in China or Northern Europe, or for Hapag-Lloyd to buy one in Singapore or South America?
Now Maersk doesn’t refine its own oil — it merely produces crude. But the mere presence of its oil business acts as a major hedge against rising fuel costs, and a natural hedge at that. Maersk doesn’t need to engage in risky fuel hedging strategies that can swallow profits in years when oil prices dip.
Delta spent $12 billion on jet fuel in 2011, so a $300 million savings is only around 2.5 percent. Delta’s foray into refining is surely a small gamble to see if big gains could be made on a larger scale.
Maersk needs to make no such gamble. The line spent $5.8 billion on fuel in 2011, meaning it enjoyed a positive net of more than $2 billion when you couple that with the $7.9 billion its oil business earned. It’s not difficult to imagine how other lines would love to be able to, in effect, write off their fuel expenses.
Plus, Maersk has a goal to reduce bunker consumption by 22 percent by 2014. If successful, that alone would be nearly $1.3 billion in savings in 2011 terms. And that $1.3 billion would be more than Maersk Line has made in any single year save for 2010. It would go some way to helping defray the nearly $4 billion cost of the 20 18,000-TEU triple-E ships it has ordered, the ones that will aid Maersk in its fuel cutting ambitions.
Nor does Maersk’s ability to hedge its losses have to be considered an either/or proposition. In 2008, Maersk’s container division had healthy operating profits of $583 million, best among the public lines. But its oil business had profits of $8.9 billion that year.
In 2009, when the container shipping industry endured a historic nosedive, Maersk’s oil business made $4.7 billion. That more than offset the liner business’s record $2.1 billion loss that year.
Then, when the shipping industry bounced back in 2010 — to the tune of a record $2.5 billion profit for Maersk Line — the company’s oil business secured another $5.9 billion in profits.
In other words, it’s not as though Maersk has to trade liner profitability for oil profitability, or vice versa. In reality, success between the two has tended to compound in good years. And in years when container profits are lean or non-existent, the sizable profits from the oil business are sure nice to lean back on.
Indeed, it may be time to think of Maersk as an oil company that’s also involved in liner shipping. That may seem crazy, given that Maersk Line sits at the head of the liner shipping table relative to where Maersk’s oil business sits among the world’s biggest oil companies. But it underscores how tiny the ocean transportation market is compared to the black stuff that powers it.
And Maersk’s investment in oil many years ago has the company reaping benefits to this day.